Interest Income and Expense N Business Context

NOTE 13 Interest income and expense n Business Context

The main source of income and of expense for a will arise on deposits and monetary policy liabilities, central bank is interest revenue. Interest revenue will including compulsory reserves if remunerated. Interest come from both the securities in the foreign reserves may also be paid on foreign currency liabilities, where portfolio, and on domestic assets, such as monetary these exist. policy assets and loans to government. Interest expense

ACCOUNTING POLICY– INTEREST INCOME AND EXPENSE

a) Interest and similar income and expense For all financial instruments that are measured at amortized cost, or fair value through other comprehensive income, interest income or expense is recorded at the effective interest rate, which is the rate that exactly discounts the estimated future cash receipts or payments through the expected life of the financial instrument or a shorter period, where appropriate, to net carrying amount of the financial asset or financial liability.

The calculation takes into account all contractual terms of the financial instrument (for example, prepayment options) and includes any fees or incremental costs that are directly attributable to the instrument and are an integral part of the effective interest rate, but not future credit losses.

The carrying amount of the financial asset or financial liability is adjusted if the Bank revises its estimates of payments or receipts.

The adjusted carrying amount is calculated based on the original effective interest rate and the change in carrying amount is recorded as interest income or expense.

b) Interest income recognition base The original effective interest rate is applied to the gross carrying amount (carrying amount without reduction by expected credit loss allowance) of a financial asset for which:

● credit risk has not increased significantly since initial recognition (stage 1);

● credit risk has increased significantly since initial recognition, but which are not credit-impaired (stage 2).

For financial assets which are credit-impaired, the original effective interest rate is applied to the net carrying amount (carrying amount after reduction by expected credit loss allowance). (NBG) Expense arising on financial assets because of a negative effective interest rate is not presented as interest revenue but included with interest as an expense.

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©International Monetary Fund. Not for Redistribution DISCLOSURE – INTEREST INCOME AND EXPENSE

Interest income from international reserves relates to interest earned from investments in foreign currency securities, money market operations and foreign deposits. While interest income from monetary policy operations relates to interest earned from investments in Utopian Government Securities, but also from open market operations.

Negative interest from deposits and current accounts with banks represent charges arising from negative yielding deposits and accounts placed with foreign banks. (BOA)

As at December 31 (LC 000) 2019 2018 Interest income from international reserves Cash and cash equivalents 1,933,574 1,759,158 Debt instruments at FVPL 65,000 57,000 Investments measured at FVOCI 288,377 322,355 Interest income from domestic assets Due from resident financial institutions – – Due from government 12,552 7,224 Total interest income 2,299,503 2,145,736

Interest expenses from foreign currency items Due to non-resident financial institutions (519,706) (539,127) Due to International Monetary Fund – – Negative interest from deposits and current accounts with banks – – Interest expense from monetary policy operations – – Debt securities issued (250,000) (260,000) Due to resident financial institutions – – Total interest expense (769,706) (799,127)

NET INTEREST INCOME 1,529,797 1,346,609

n User Guidance

Disclosures on interest income and expense shall Financial liabilities measured at AC. include information per Financial assets measured at AC. ● financial instruments classification according to IFRS 9; Investments in equity instruments designated at FVOCI in accordance with paragraph 5.7.5 of IFRS 9. ● nature of the instrument and portfolio (foreign reserves or domestic currency). Financial assets measured at FVOCI in accordance with paragraph 4.1.2A of IFRS 9, showing separately the According to IFRS 7.20, central banks shall disclose amount of gain or loss recognised in OCI during the interest income and expense either in the statement of period and the amount reclassified upon derecognition comprehensive income or in the notes: from accumulated OCI to profit or loss for the period; (a) net gains or net losses on: and

Financial assets or financial liabilities measured at (b) Total interest revenue and total interest expense FVPL. For financial liabilities designated as at FVPL, (calculated using the effective interest method) for separately the amount of gain or loss recognized in OCI financial assets that are measured at AC or that are and the amount recognized in profit or loss. measured at FVOCI in accordance with paragraph 4.1.2A of IFRS 9 (showing these amounts separately).

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©International Monetary Fund. Not for Redistribution Optional information to be provided regarding the levels of interest rates earned per instrument or interest rates on monetary policy instruments either in the Interest revenue/expense note or in the related note.

Central banks may also experience negative interest rates both from the assets (e.g. negative yields for financial instruments) and liabilities side (e.g. negative remuneration for obligatory reserve requirements). According to Interpretations Committee Agenda Decision in January 2015, interest resulting from a negative effective interest rate on a financial asset does not meet the definition of interest revenue.

Consequently, the expense arising on a financial asset because of a negative effective interest rate should not be presented as interest revenue, but in an appropriate expense classification. Same logic applies for the liabilities side. (Interpretations Committee agenda decision of January 2015)

See the statement from the Interpretations Committee— Income and expenses arising on financial instruments with a negative yield—presentation in the statement of comprehensive income (IAS 39 Financial Instruments: Recognition and Measurement and IAS 1 Presentation of Financial Statements)—January 2015

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